For the past couple of years, Hollywood has been intensely hyping its digital dealmaking, both to the press and to Wall Street.
Hardly a day goes by without an announcement trumpeting deals for downloads on gadgets ranging from iPods to Xboxes or for streaming content on seemingly every website.
But all that hype is biting back at the bargaining table.
Accounting for digital revenues has emerged as a major sticking point during the three months of contract negotiations between companies and the Writers Guild of America. The guild has seized on Hollywood’s bullishness over digital deals to hammer home its dual points: Digital media revenues will be a major driver of revenue growth at the media congloms, and writers deserve a slice.
The trouble is that there’s still a big gap between the promise of future revenues and the reality of actual revenues.
The amount of money flowing into Hollywood from digital distribution is still miniscule, particularly on the movie side. The studios are each making less than about $20 million annually from all the different ways their movies can be downloaded, according to studio and digital media insiders.
On the TV side, things are a little better, as more people want to download TV shows. But insiders estimate that the major networks are bringing in well under $100 million each vs. $22 billion spent on network TV advertising in the U.S. in 2006, according to TNS Media Intelligence.
No one knows when a windfall will come, if it ever does. Studios say it’s undoubtedly further away than the three years any WGA deal will encompass. But guild negotiators don’t want to fall behind the growth curve of a new medium.
It’s easy to see why the studios and TV networks want to hype the potential of digital: With DVD sales on the decline and viewers skipping TV ads on DVRs, the media biz needs to prove that it has a growth path for the future.
But John Bowman, chairman of the WGA’s negotiating committee, has zeroed in on what he calls the “disconnect” between what the companies have told Wall Street and what had been said after the first two days of negotiations in July.
“Investors are hearing about the changing landscape in entertainment and exciting new markets to exploit,” Bowman said. “In contrast, the AMPTP communicates nothing but problems to the Writers Guild.”
The WGA has also published multiple charts that spotlight such sunny forecasts — such as an eMarketer study showing online streaming revenues growing 63% annually from $775 million this year to $2.9 billion in 2010, with the assertion that Hollywood studios will capture 75% of online video ad revenues.
“Positive economic events are daily giving the lie to (the companies’) doomsday scenario,” Bowman said at the time.
That disconnect is a big problem for studios and networks as they approach labor negotiations.
“Everybody realizes there is going to be something here,” said Bruce Eisen, head of consultancy Digital Advisors and the former prexy of movie download site CinemaNow. “But what they’re doing is figuring it out. In the world of studio money, it’s not even close to there yet.”
The guilds are justifiably dubious: When it comes to digital media, Hollywood seems to have a poverty story for the guilds and a success story for everyone else.
“I had a major network come in and complain to me about how shitty their iPod deal is,” recounted one senior digital media exec. “I told them, ‘I sure wouldn’t know that from what you’re saying in the press.’ ”
But on the whole, digital media does indeed seem to be more hype than reality for Hollywood. On the movie front, studios are selling or renting fewer than 20,000 downloads of a movie title. That’s a miniscule number compared to the millions of DVDs being sold.
Insiders expect the download figure to grow, but not substantially in the near term. And, they all agree, digital movie distribution won’t be a viable business until download prices are cheaper than DVDs and downloads are readily viewable on TV screens.
NBC, ABC, CBS and Fox have all restructured their license agreements with studios to give them broad latitude to repurpose network shows for the Web. And over the past year, they’ve renegotiated affiliation agreements with local stations to allow them to stream episodes through their own websites and others like Yahoo, AOL, MSN and the News Corp.-NBC U joint venture Hulu.com.
Still, in terms of revenue, the digital initiatives of the nets are more promotional than profitable. Madison Avenue is enamored with online video advertising but will spend only about $500 million on online video ads in 2007, according to PricewaterhouseCoopers, in part because the auds remain comparatively small.
“It’s expensive, and there is very little inventory to buy, but the consumer is a light TV viewer, so we are testing it,” said Tim Spengler, chief activation officer for Initiative Media, at a recent conference.
But the WGA is also looking to the future. Digital media is indeed small now, but so was homevideo when the guild struck what it considers to be a disastrous deal on that front in 1985. For its part, the Alliance of Motion Picture & Television Producers points out that WGA members have received hundreds of millions of dollars from the homevid agreement.
While traditional advertising spending was down in the first half of 2007, online ad spending rose more than 17%. The question for Wall Street is whether digital revenues will rise quickly enough to replace declining network TV advertising.
As technology advances, digital distribution could also increasingly replace traditional methods by which creators currently make residuals. For now, cable/satellite TV and DVDs are clearly superior to Internet streams and downloads both in convenience and image quality — particularly when the content is in high definition.
But that will likely change. Instead of buying or renting DVDs, consumers may one day use the broadband connection on their TVs to download or stream any movie they want. Instead of watching a repeat of a TV show, they could just order from the Net whenever they want content on-demand.
But no one knows when that day will arrive. At the start of negotiations in July, the AMPTP offered the WGA two options — extend the current contract for three years so an independent study could be conducted to sort out how writers should be compensated amid the fast-changing digital market; or agree to a revolutionary revamp of the residuals system under which writers would be paid residuals only after producers recover basic costs.
The WGA rejected both ideas on the spot, prompting the AMPTP to take the study proposal off the table.
With the current contract expiring on Oct. 31, both sides are due back at the bargaining table Tuesday, and the guild is seeking strike authorization from its 12,000 members. The only optimistic speculation that has emerged has centered on the AMPTP bringing back the study idea, although WGA leaders have been especially dismissive of that notion.
Bowman has said the study idea was flawed because it was premised on the same reasoning as the 1985 homevideo deal — “Models haven’t emerged, the environment is uncertain, we’ll take care of you later.”
“Well,” said Bowman, “We know what happened then. Homevideo and DVD sales soared, and nobody got taken care of.”
(Dave McNary in Hollywood contributed to this report.)